A2: Other Reports

Question 1

An auditor may express an opinion on an entity’s accounts receivable balance even if the auditor has disclaimed an opinion on the financial statements taken as a whole provided the:

Answer 1

Report on accounts receivable is presented separately from the disclaimer of opinion on the financial statements

If the auditor has disclaimed an opinion on the financial statements taken as a whole, the auditor may express an opinion on an entity’s accounts receivable balance ONLY if the special report on accounts receivable is presented separately from the disclaimer of opinion on the financial statements and the accounts receivable balance does not constitute a major portion of the entity’s complete set of financial statements

Question 2

Financial information is presented in a printed form that prescribes the wording of the independent auditor’s report. The form is NOT acceptable to the auditor because the form calls for statements that are inconsistent with the auditor’s responsibility. Under these circumstances, the auditor most likely would:

Answer 2

Reword the form or attach a separate report

An auditor should not sign a preprinted report that include statements that are inconsistent with the auditor;s responsibility. Instead, the form should be revised or a separate, more accurate report should be attached

Question 3

Harris, CPA, has been asked to audit and report on the balance sheet of Fox Co., but not on the statements of income, retained earnings, or cash flows. This audit will not be performed in conjunction with an audit of the complete set of financial statements. Under these circumstances, Harris may:

Answer 3

Accept the engagement because such engagements merely involve special considerations in the application of U.S. GAAS

An audit of a single financial statement is permitted under U.S. GAAS. An audit of a single financial statement can be performed as a separate audit or in conjunction with an audit of the complete set of financial statements

Question 4

Delta Life Insurance Co. prepares its financial statements on an accounting basis insurance companies use pursuant to the rules of a state insurance commission. If Wall, CPA, Delta’s auditor, discovers that the statements are not suitably titled, Wall should:

Answer 4

Disclose any reservations in a basis for modification paragraph and qualify the opinion

Financial statements prepared in accordance with a comprehensive basis of accounting other than GAAP that are not suitably titled require a qualified opinion with a basis of modification paragraph

Question 5

In reviewing the financial statements of a nonissuer, an accountant is required to modify the standard report for which of the following matters?

Answer 5

Inability to assess the risk of material misstatement due to fraud: NO
Discovery of significant deficiencies in the design of the entity’s internal control: NO

Modifications are made to the standard review report only when there is a departure from generally accepted accounting principles. Neither an inability to assess risk nor a discovery of internal control deficiencies constitutes a departure from GAAP, and therefore neither would result in a modified review report. Note that assessing the risk of material misstatement due to fraud is a requirement of an audit, not a review. Also, note that testing of internal control is not required in a review of financial statements of a nonissuer.

Question 6

An accountant has compiled the financial statements of a non-issuer but declines to issue a compilation report. This is an example of:

Answer 6

An inappropriate reporting decision, because SSARS require that a report be issued when an accountant has compiled the financials statements

SSARS requires compiled financials statements to be accompanied by a compilation report.

Question 7

During an engagement to review the financial statements of a non-issuer, an accountant becomes aware that several leases that should be capitalized are not capitalized. The accountant considers these leases to be material to the financials statements. The accountant decides to modify the standard review report because management will not capitalize the leases. Under these circumstances, the accountant should:

Answer 7

Disclose the departure from GAAP in a separate paragraph of the accountant’s report

Failure to properly capitalize leases that the accountant considers material to the financial statements is a departure from GAAP. If management will not capitalize the leases, the accountant should modify the standard review report or withdraw from the engagement. If modification to the report is sufficient to disclose the departure from GAAP, then the accountant may modify the review report.

Question 8

If requested to perform a review engagement for a non-issuer in which an accountant has an immaterial direct financial interest, the accountant is:

Answer 8

Not independent and, therefore, may not issue a review report

An accountant with an immaterial direct financial interest in a client is no longer independent with respect to that client. The accountant is precluded from issuing a review report on the financial statements of an entity with respect to which he is not independent. If the accountant is not independent, he may issue a compilation report provided he complies with the compilation standards

Question 9

Kell engaged March, CPA, to prepare to Kell a written personal financial plan containing unaudited personal financial statements. March anticipates omitting certain disclosures required by GAAP because the engagement’s sole purpose is to assist Kell in developing a personal financial plan. March is:

Answer 9

Not required to follow SSARS because preparing written personal financial plans are excluded from SSARS requirements

SSARS explicitly states that SSARS does not apply when an accountant prepares personal financial statements for inclusion in written personal financial plans. Other situations where SSARS does not apply is when the accountant prepares financial statements:

• solely for submission to taxing authorities
• in conjunction with litigation services that involve pending or potential legal or regulatory proceedings
• in conjunction with business valuation services

Question 10

Compiled financial statements should be accompanied by an accountant’s report stating that:

Answer 10

The accountant conducted the compilation in accordance with Statements on Standards for Accounting and Review Services

Compiled financial statements should be accompanied by a report stating that the compilation was conducted in accordance with SSARS promulgated by the Accounting and Review Services Committee of the AIPCA

Question 11

Moore, CPA, has been asked to issue a review report on the balance sheet of Dover Co., a non-issuer. Moore will not be reporting on Dover’s statements of income, retained earnings, and cash flows. Moore may issue the review report provided the:

Answer 11

Scope of the inquiry and analytical procedures has not been restricted

An accountant may issue a review report on one financial statement, such as a balance sheet, and not on other related financial statements, if the scope of the accountant’s inquiry and analytical procedures has not been restricted

Question 12

Which of the following procedures is usually performed by the accountant in a review engagement of a non-issuer performed in accordance with Statements on Standards for Accounting and Review Services?

Answer 12

Comparing the financial statements with statements for comparable prior periods

Comparing the financial statements for comparable prior periods (analytical procedures) is a procedure that is usually performed by the accountant in a review engagement of a non-issuer

Question 13

Which of the following procedures is more likely to be performed in a review engagement of a nonissuer than in a compilation engagement?

Answer 13

Obtaining a representation letter from the CEO

Obtaining a representation letter from the CEO is more likely to be performed in a review engagement of a nonissuer (where obtaining the letter is required) than in a compilation engagement

Question 14

When an accountant performs more than one level of service (for example, a compilation and a review, or a compilation and an audit) concerning the financial statements of a non-issuer, the accountant generally should issue the report that is appropriate for:

Answer 14

The highest level of service rendered

When an accountant performs more than one level of service (for example, a compilation and a review, or a compilation and an audit) concerning the financial statements of a non-issuer, the accountant generally should issue the report that is appropriate for the highest level of service rendered

Question 15

Which of the following is NOT true about documentation requirements related to a review of a nonissuer’s financial statements?

Answer 15

The auditor must document evidence obtained about the operating effectiveness of controls

The accountant is not required to evaluate control risk or test the operating effectiveness of controls in a review of a nonpublic entity’s financial statements

Question 16

Which of the following should be the first step in reviewing the financial statements of a nonissuer?

Answer 16

Obtaining a general understanding of the entity’s organization, its operating characteristics, and its products or services

In reviewing the financial statements of a nonissuer, the accountant’s first step would be to obtain a general understanding of the entity’s organization, its operating characteristics, and its products or services

Question 17

Which of the following describes how the objective of a review of financials statements differs from the objective of a compilation engagement?

Answer 17

In a review engagement, accountants provide limited assurance, but a compilation expresses no assurance

A review rovides limited assurance that there are no material modifications that should be made to the financial statements in order for them to be in conformity with generally accepted accounting principles, whereas a compilation provides no assurance

Question 18

Which of the following actions should an accountant take when engaged to compile a company’s financial statements in accordance with Statements on Standards for Accounting and Review Services (SSARS)?

Answer 18

Perform the engagement even though independence is compromised

An accountant who is not independent with respect to an entity may compile financial statements for such an entity and issue a report. The last paragraph of the report should disclose this lack of independence. The accountant is permitted, but not required, to disclose the reasons for the lack of independence

Question 19

Which of the following statements would be appropriate in an accountant’s report on compiled financials statements of a nonissuer prepared in accordance with Statements on Standards for Accounting and Review Services (SSARS)?

Answer 19

We were not required to perform any procedures to verify the accuracy or completeness of the information provided by management

The accountant’s report in a compilation engagement should include a statement that the accountant was not required to perform any procedures to verify the accuracy or completeness of the information provided by management

Question 20

Which of the following procedures would an accountant least likely perform during an engagement to review the financial statements of a nonissuer?

Answer 20

Observing the safeguards over access to and use of assets and records

Observing safeguards over access to and use of assets and records is part of the study and evaluation of the client’s internal control; such an evaluation is not conducted in a review

Question 21

In an accountant’s review of interim financial information, the accountant typically performs each of the following, except:

Answer 21

Obtaining corroborating external evidence

When performing a review engagement, the accountant should perform procedures to accumulate evidence to provide a reasonable basis for obtaining limited assurance that there are no material modifications that should be made to the financial statements in order for the statements to be in conformity with the applicable financial reporting framework. The accountant should use professional judgement to determine the nature, timing and extent of review procedures, which consist primarily of inquiry and analytical procedures. As such, obtaining corroborating external evidence would generally not be required

Question 22

Which of the following statements would not normally be included in a representation letter for a review of interim financial information?

Answer 22

We understand that a review consists principally of performing analytical procedures and making inquiries about the interim financial information

This statement would likely be found in an engagement letter, not a management representation letter

Question 23

Which of the following circumstances would generally require an accountant to decline to perform a compilation of financial statements under Statements on Standards for Accounting and Review Services?

Answer 23

The accountant was not able to come to an understanding with representatives of the organization for services to be performed

An accountant should establish an understanding with management and, when appropriate, those charged with governance, regarding the services to be performed for a compilation engagement. An accountant generally should decline a compilation engagement when the accountant is unable to come to an understanding with representatives of the organization regarding the services to be performed

Question 24

Which of the following statements is true with regard to review services performed under Statements on Standards for Accounting and Review Services?

Answer 24

In a review, an accountant will express limited assurance as to generally accepted accounting principles on the financial statements

In a review, an accountant will express limited assurance as to generally accepted accounting principles on the financial statements. This limited assurance is expressed in the report by the statement “we are not aware of any material modifications”

Question 25

When financial statements that an accountant has compiled in accordance with Statements on Standards for Accounting and Review Services omit substantially all disclosures required by generally accepted accounting principles, the accountant’s report should include:

Answer 25

Information alerting readers about omission of the disclosures and notification that the omission may influence the user’s conclusions about the financial statements

An accountant may compile financial statements that omit substantially all disclosures required by GAAP as long as the compilation report includes a separate paragraph which alerts readers about omission of the disclosures and includes notification that the omission may influence the user’s conclusions about the financial statements. In addition, the accountant should be satisfied that the omission is not intended to mislead users of the financial statements

Question 26

The annual financials statements of a publicly held company have been audited, and its interim financial statements have been reviewed. Which of the following is true about the application of professional standards to this review?

Answer 26

PCAOB standards apply

A review of the interim financial information of a publicly held company is conducted in accordance with PCAOB standards

Question 27

An independent accountant’s report is based on a review of interim financial information. If this report is presented in a registration statement, a prospectus should include a statement clarifying that the:

Answer 27

Accountant’s review report is not a part of the registration statement within the meaning of the Securities Act of 1933

If a report on a review of interim financial information is presented in a registration statement, the prospectus should include a statement that the report is not a “report” or “part” of the registration statement. The accountant should also read the other portions of the registration statement to ensure that his or her name is not used in a was that indicates greater responsibility than s/he intends

Question 28

Which of the following matters is covered in a typical comfort letter?

Answer 28

An opinion as to whether the audited financial statements comply in form with the accounting requirements of the SEC

In a typical comfort letter, the accountants express an opinion (i.e. positive assurance) concerning the financial statements’ compliance (as to form) with the pertinent accounting requirements of the SEC

Question 29

In an attest engagement, use of the accountant’s report should be restricted to specified parties in all of the following situations, except:

Answer 29

When reporting on an assertion about the subject matter instead of reporting directly on the subject matter

There is no requirement that the accountant’s report be restricted to specified parties when reporting on an assertion about the subject matter instead of reporting directly on the subject matter

Question 30

An accountant’s compilation report on a financial forecast should include a statement that:

Answer 30

There will usually be differences between the forecasted and actual results

The accountant’s compilation report on a client’s financial forecast should include a caveat that the prospective results may not be achieved

Question 31

Which of the following is a conceptual difference between the attestation standards and generally accepted auditing standards?

Answer 31

The attestation standards provide a framework for the attest function beyond historical financial statements

Attestation standards provide a framework for the attest function beyond historical financial statements

Question 32

Accepting an engagement to examine an entity’s financial projection most likely would be appropriate if the projection were to be distributed to:

Answer 32

A bank with which the entity is negotiating for a loan

Financial projections are hypothetical, “what if” prospective financial statements. Because the user may need to ask the responsible party questions about the underlying assumptions, financial projections are “restricted use” reports, whose use if restricted to the responsible party and those third parties with whom the responsible party is negotiating directly

Question 33

Which of the following is NOT an attestation standard?

Answer 33

A sufficient understanding of internal control shall be obtained to plan the engagement

A sufficient understanding of internal control is NOT required to be obtained in an attestation engagement

Question 34

An accountant’s compilation report on a financial forecast should include a statement that the:

Answer 34

Compilation does not include evaluation of the support of the assumptions underlying the forecast

An accountant’s compilation report on a financial forecast should include a statement that the compilation does not include evaluation of the support of the assumptions underlying the forecast. (An examination of the financial forecast would include evaluation of the support)

Question 35

Prospective financial information presented in the format of historical financial statements that omit either gross profit or net income is deemed to be a:

Answer 35

Partial presentation

“Partial presentations” are presentations of prospective financial information which would not ordinarily be appropriate for general use because they omit one or more of these essential elements: (a) sales or gross revenue, (b) gross profit or cost of sales, (c) unusual or infrequently occurring items, (d) provision for income taxes, (e) discontinued operations or extraordinary items, (f) income from discontinuing operations, (g) net income, (h) earnings per share, and (i) significant changes in financial position

Question 36

When an accountant compiles projected financial statements, the accountant’s report should include a separate paragraph that:

Answer 36

Describes the limitations on the projection’s usefulness

The accountant’s report on compiled projected financial statements should include a separate paragraph that describes the limitations on the projection’s usefulness. For example, the paragraph states that there will usually be differences between projected and actual results, and indicates that the accountant has no responsibility to update the report for events occurring after the date of the report

Question 37

Which of the following procedures should an accountant perform during an engagement to compile prospective financial statements?

Answer 37

Make inquires about the accounting principles used in the preparation of the prospective financial statements

An accountant performing an engagement to compile prospective financial statements should make inquiries about the accounting principles used in the preparation of the prospective financial statements

Question 38

Which of the following statements should be included in a practitioner’s report on the application of agreed-upon procedures?

Answer 38

A statement referring to standards established by the AICPA

A statement referring to standards established by the AICPA should be included in a practitioner’s report on the application of agreed-upon procedures